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We hosted the senior management team of Kirloskar Oil Engines at Singapore and the key takeaways from the Investor Day were as follows: a) management reiterated its 2X-3Y strategy, where it targets to double revenue over next 3 years (FY22-25), b) three pronged strategy to improve margins including focus on exports (target to reach 30% of sales vs 12%), improved aftermarket sales (improve service-to-equipment ratio) and better margins in B2C segments (from break even levels to high single digits), c) rejigged core business into separate reporting segments of B2B and B2C, with newly appointed business heads to improve focus on growth and profitability, d) CPCB-4 norms implementation to increase the addressable market size in new geographies and improve aftermarket sales due to increasing complexity of products and e) ARKA Fincap on track to build loan book size to INR50bn, as its nearing equity infusion cap of INR10bn and will evaluate equity fund raising options. We maintain BUY rating on the stock.

* Reiterated its 2X-3Y strategy: Management reiterated its 2X-3Y strategy, where it targets to double its standalone revenue to INR65bn by FY25E, implying 26% CAGR over the same period. The strategy rests on five strategic pillars with individual segment targets namely a) protect the core business and grow organically at 7% CAGR, b) to increase market share in HHP segment by addressing nodes above 1,500kVA, which primarily cater to applications like data centres and infrastructure, c) to improve share of exports from 12% of sales to 30% of sales, d) to increase aftermarket wallet share by increasing service-to-equipment ratio and e) widening of product portfolio as well as introduction of alternate fuel products under its ‘Destination Zero’ strategy.

* Three-pronged strategy to improve margins: Management aims to improve margins to double digits by FY25E, through focus on 3 key areas: a) improvement in business mix through increase in exports as it targets new markets post CPCB-4 implementation for gensets and build exports of electric pumps (including LGM) by taking away market shrae from Chinese players, b) targeting 8-10% EBTIDA margins in agriculture segment vs a loss in FY22 through efficiency improvement and price pass through in key categories and c) higher aftermarket sales through increased sservicing intensity to 25-30% of equipment sales vs 15% currently and increasing complexity of products under CPCB-4 to reduce presence of unorganised segment.

* Rejigged core business segments with separate business heads: The company aligned its reporting segments into B2B, B2C and Financial Services with its respective business heads, Mr Rahul Sahai (CEO-B2B), Mr Aseem Srivastav (CEO-B2C) and Mr Vimal Bhandari (CEO-Arka FIncap). Mr Sahai’s experience in building aftermarket sales at Cummins India and Mr Srivastav’s experience in managing exports at Kirloskar Brothers and L&T will be instrumental to KOEL’s growth ambitions.

* Maintain BUY with TP of INR400: We maintain BUY with TP of INR400, as valuations remain inexpensive at 11x standalone Mar’25E EPS. Our TP assigns 12x PE to standalone entity, 8x PE to LGM (100% stake) and cash+invest (including Arka Fincap) at 0.5x BV.

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